Land market observers and participants alike are apprehensive
about the frenzied atmosphere in the market. Noting an increase in borrowing
among buyers and skyrocketing price increases, many fear that current market
conditions will be unsustainable in the long run. These misgivings have emerged
as Texas land markets continued to push into uncharted territory in 2006. Driven
by an unprecedented demand for land, the statewide price per acre jumped 23
percent over 2005 market levels. The price of Texas rural land soared from
$1,483 per acre in 2005 to $1,825 per acre in 2006 (Figure 1).

he
2006 price represented appreciation at a 14 percent annual compound rate since
2001 and a more than 93 percent total increase over the five-year period. This
was the fourth straight year annual price growth exceeded 10 percent.

The real or inflation-adjusted price of $365 per acre in 1966
dollars pushed past the previous record high set in 2005 by $59 per acre.
Nominal prices shown in Figure 1 reflect the actual prices paid while real
prices represent nominal prices adjusted for inflation. The real price change,
in terms of purchasing power, shows prices rose 20 percent above inflation in
2006.

Sales volume remained strong (Figure 2). Fueled by high
demand, Texas recorded 8,215 sales, slightly below 2005's record volume of
8,368. The explosion in land-buying activity that began in 2002 continues
unabated.

At 98 acres, the typical transaction remained at the low end
of the size spectrum. Tract size has fallen below 100 acres and remains
substantially less than the 140-acre levels posted in 1997-98 (Figure 3).

The drop in tract size roughly coincided with the increase in
sales volume as a growing number of buyers scoured the countryside for
properties that met their land purchase budgets. The rush to subdivide larger
holdings has resulted in a shortage of larger properties.

Buyers clamoring for larger holdings no longer choose among
properties sellers have placed on the market. Instead, a buyer's representative
now frequently locates a property matching a seller's specified search criteria
and approaches the owner, making repeated offers until he or she decides to
sell. The prevalence of these bidding transactions may be partially responsible
for the sizable increases in market prices.

Specifically, these buyer-initiated transactions normally
focus on highly desirable properties. Therefore, they could alter the market's
composition by including a higher percentage of superior-quality properties than
in the normal historical setting in which buyers choose from listed properties.
If current sales consist heavily of the highest quality land, the measured
appreciation rate may be higher than the actual appreciation rate for the state
as a whole.

As Texas evolved from an agricultural to an urban-based
society, nonfarm buyers flocked to the countryside, buying acreage for
recreation and investment. In the past decade, these buyers have come to
dominate market activity.

Many land market participants note that 1031 exchanges, often
involving buyers from outside Texas, are motivating a substantial number of
transactions in Texas land markets. And rising corn prices, in response to an
expected increase in demand for ethanol, have prompted farmers to return to the
land market. All three of the traditional pools of prospective buyers -
consumers, investors and producers - should be active in Texas' land market in
the next year.

n
2006, the geographic distribution of land prices (Figure 4) continued to reflect
both population density and the draw of scenic properties. Most of the higher
prices occurred in the heavily populated eastern portion of the state.

The highest prices surrounded Dallas-Fort Worth, Houston, El
Paso, Austin and the Lower Rio Grande Valley. The Hill Country's high prices
stretched westward from Austin through Fredericksburg to Kerrville. The
lowest-priced land ran through West Texas from Amarillo to the Trans-Pecos area
to the Rio Grande.

The highest percentage price gains were geographically
dispersed (Figure 5). Urban areas near Houston, Dallas and San Antonio all
increased more than 30 percent, fueled by demand from homebuilders, developers
and private equity firms. The Wichita Falls area continued to grow rapidly, as
did San Antonio and Fredericksburg. The largest percentage price jump was in the
Trans-Pecos region, where small properties sold in larger-than-normal numbers,
substantially driving up the median price for the area. None of the regions
posted lower prices.

arket
developments in 2006 reflected an increasingly intense contest for control of
the Texas countryside. Investment-minded buyers continued to pour funds into
land purchases, and recreational buyers rushed to get in before prices climbed
even higher.

In 2007, forces propelling prices upward have accelerated and
expanded. Markets appear poised to reach even higher levels. Some investors seem
to sense inflation ahead and are searching out tangible assets, including land.
Tax considerations continue to spark demand for land as well. Meanwhile,
institutional and foreign investors have developed an appetite for Texas forest
land. These circumstances have prompted market participants to repeatedly note a
dearth of quality listings. Brokers are maintaining long lists of potential
buyers.

A number of potential pitfalls are on the horizon. High
energy prices could adversely impact the demand for recreational and development
land. Further interest rate hikes may take a toll. Farm policy is in complete
disarray, so no one can realistically predict operating conditions for farmers
in the near future.

Despite these potential problems, current activity suggests
that by the end of 2007, Texas land prices will post another sizable gain.

Dr. Gilliland (c-gilliland@tamu.edu)
is a research economist and Klassen and Pachchigar are research assistants with
the Real Estate Center at Texas A&M University.